Avenue Supermarts Ltd, which runs the DMart supermarket retail chain, has been bearing the brunt of a weak sales mix over the past few quarters. The Problem: Revenue from the high-margin general merchandise and apparel segment has been adversely affected by lower consumer spending.
As a result, Dmart’s margin has taken a hit. In each of the last three quarters, standalone earnings before interest, tax, depreciation and amortization (EBITDA) margin declined on a year-on-year basis. in the March quarter (Q4FY23), while revenue grew 20% year-on-year 10,337 crore, the Ebitda growth has been slow at only 5.4%. “This is the slowest (Ebitda) growth we have seen since listing and was also much lower than our somewhat muted expectations,” said analysts at JM Financial Institutional Securities.
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DMart’s Q4 revenue growth was driven by expansion in the retail business segment, which was up 16.5%. Of course, the company’s retail segment and total revenue are now well ahead of pre-Covid levels (Q4FY19). However, unit economics measures are still lagging behind. For example, as the accompanying chart shows, revenue per square foot in Q4 was down about 9% from pre-Covid levels. “We believe, this is due to under-recovery in general merchandise and apparel; and larger sized (around 45,000-50,000+ sq ft) stores added by DMart during FY19-23 (now 63% of total retail area),” said analysts at ICICI Securities in a May 14 report. Pre-Covid By lower bill per store as compared to levels.
Note that contrary to expectations of recovery, the general merchandise and apparel segment’s share in revenue fell to 23.04% in FY23 as compared to 23.40% in FY2012. For perspective, this measure was up over 27% in FY20. Higher competitive intensity in apparels may weigh on the overall segment. Analysts at ICICI Securities said, “As per our channel investigation, in the apparel segment (general merchandise and apparel accounts for around 50% of the retail sector), Dmart faces stiff competition from specialist retailers like Judio, Max etc. Used to be.”
Additionally, the performance of DMart’s new stores has been below expectations. DMart has said same store sales growth (SSSG) for the half year ended March (H2FY23) for stores that are at least 24 months old stood at 11% as compared to H2FY22. Some analysts say this performance is better than expected. But, “this implies that new stores are performing poorly and pulling down the system average significantly. This needs to be worked on,” JM Financial analysts said.
For FY23, SSSG stood at 24.2% as compared to FY22, partly aided by a lower base in Q1. Meanwhile, DMart has commenced operations of its pharmacy shop-in-shop in Q4 through the launch of its first outlet. Analysts at Kotak Institutional Equities believe DMart’s pilot of in-store pharmacy reflects efforts to counter weak SSSG.
To be sure, FMCG and Staples’ revenue growth continued to outperform, supporting DMart’s overall growth. In FY23, the company added 40 stores, taking the total count to 324. While store additions will boost revenue growth, recovery in the general merchandise and apparel segment is a key watch for the stock.
DMart shares fell 4% on Monday in reaction to Q4 results, which were announced on Saturday. Note that even after the third and second quarter results were announced, the stock reaction was muted. As things stand, the stock is down about 24% from its 52-week high 4,609 in September to Rs. But it’s not that the stock trades at around 58 times FY25 estimated earnings and valuations are downright cheap, according to Bloomberg data.
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